What is Annual Accounting VAT?
The Annual Accounting VAT scheme is one method of paying VAT designed to reduce the administrative burden on small businesses. VAT-registered businesses usually submit their VAT Returns to the HM Revenue and Customs (HMRC) four times a year (quarterly). With this scheme, your business is required to submit only one VAT return per annum. Usually, you will make nine interim VAT payments based on your business's estimated total liability for the year, with one balancing payment due to the VAT return.
This scheme helps with budgeting and cash flow and reduces paperwork significantly.
Once businesses submit their VAT Return, they can either make the last payment for the year (the difference between the estimated and actual VAT bill) or apply for a refund (if you've overpaid your VAT bill). This VAT return will serve as a benchmark for the estimated VAT bill to pay their instalments.
How is VAT paid under the annual accounting scheme?
If it is your first year under the annual accounting scheme, payment instalments for the first 12 months will be based on an estimate of your VAT liability, as advised by the HMRC.
Your first annual accounting period will be at the start of the quarter you made your application to join the scheme. If you applied late in the quarter, your annual accounting period would start at the beginning of the next quarter.
For businesses that have been registered for more than 12 months, you have an option to pay your VAT in nine monthly instalments. Each instalment is 10% of the amount of the actual VAT bill of the previous accounting year. These payments are due at the end of months 4 to 12 of the tax year.
Another payment option available is quarterly VAT payments. Each instalment is 25% of the previous tax year's actual bill and is due to be settled at the end of months 4, 7, and 10 of the current tax year.
You'll then owe the balance of VAT for that year, plus the VAT return, two months after the annual accounting period.
Individuals and owners can make applications to change payment methods for instalments to HMRC at any point. This is great for budgeting and cash flow control when your business's turnover has increased or decreased.
Who is eligible to join the scheme?
VAT-registered businesses as eligible to join the scheme so long as your estimated VAT taxable turnover (the sum of all VATable sales your business sold) for the year is not over £1.35 million.
In some cases, a business might be able to meet the two requirements but will still not be eligible to apply for the annual accounting scheme.
In those cases, the business:
left the Annual Accounting Scheme in the last 12 months
has unsettled VAT returns and payments
is part of a VAT-registered division or group of companies
You'll have to leave the scheme if you're no longer eligible for any of the above reasons, or your VAT taxable turnover is predicted to exceed £1.6 million by the end of the tax year.
The HMRC can also remove you from the scheme for several reasons, including:
Incorrect calculation of VAT
Convicted of committing VAT offence
Received penalty for VAT evasion
If you decide that the scheme is not suitable for your business, you can also leave voluntarily at any time by writing to HMRC.
Businesses who wish to apply can do so online, download the necessary forms on the HMRC website.
There are two separate forms available, form VAT600AA is for application to the annual accounting scheme, while form VAT600AA/FRS is used if you want to use the flat rate scheme in conjunction with the annual accounting scheme.
HMRC will advise you in writing once the application has been accepted.
Advantages and disadvantages of the Annual accounting VAT scheme
One of the most significant advantages of the annual accounting scheme is the reduced administrative workload involved. Instead of filing four VAT returns, businesses under this scheme need to file only once per tax year.
Moreover, the liability to be paid monthly or quarterly is known and certain, making cash flow management more manageable.
Businesses also have extra time to submit their annual VAT return and settle any outstanding tax payments. It also simplifies businesses calculations.
However, the scheme also comes with some disadvantages. Businesses that regularly reclaim VAT might not be well-suited for an annual accounting scheme, as they will only be able to get a refund at the end of the tax year.
Since payments are based on previous years revenue, Interim payments might also be higher than necessary where turnover has fallen. However, this can be adjusted, especially if the difference is significant.
Additionally, if you are not maintaining your accounting paperwork correctly throughout the year, tracking and identifying the nature of some unusual transactions will be more difficult.
Reporting changes to HMRC
Businesses registered under the annual accounting VAT scheme need to report significant business changes to HMRC such as:
If turnover is likely to be significantly higher or lower than the previous year
VAT taxable turnover is expected to be more than £1.6 million, especially in cases where a business buys another business
If the amount of VAT payable has (or will) increased by at least 10% from the last instalment calculation.
There are a number of VAT schemes available for businesses.
The annual accounting VAT scheme can also be used in combination with the cash accounting VAT scheme and the flat rate VAT scheme.
Consult with a qualified accountant to determine whether the annual accounting scheme will beneficial your business.
Other VAT schemes you might want to consider: